A planned reform of the US tax system designed to attract economic activity and jobs to the country could also put US companies beyond the reach of European state aid rules, an EU official told EURACTIV’s media partner PaRR.

On 9 February, US President Donald Trump promised to announce a “phenomenal” tax reform in the next two or three weeks.

The text of a reform to be voted by US Congress will combine elements of Trump’s manifesto pledges with proposals by the Republican group in the House of Representatives, as widely reported.

Trump promised a tax cut for every income level, a corporate tax reduction to 15% and a one-time 10% repatriation tax rate for corporate profits held overseas.

The Republican group’s proposals, steered by Texas congressman Kevin Brady, include a corporate tax rate of 25% for small businesses; 20% for large businesses and a “repatriation tax holiday” at 8,75%.

The European Commission predicted in its winter forecast €226 billion in additional spending as part of the fiscal stimulus promised by the new US government, but its economic impact will be “very low”.

Border adjustment tax

Another key element of House Republicans’ plan is a so-called border adjustment tax (BAT), similar to value added tax (VAT) as currently employed in all OECD member states except the US.

By imposing a 20% tax on imports and exempting exports, the BAT is designed to incentivise corporations with large exporting activities to operate from within the US.

The BAT would compensate the disadvantage US exporting companies suffer compared to foreign competitors operating in a VAT system.

According to the EU official, the measure would likely not increase the total US tax income, but rather be contemplated as a way to attract economic activity and employment to the US.

No more tax rulings for Apple?

Countries’ tax authorities only grant rulings to companies that are incorporated on their own territories where they are liable for taxation. If US companies such as Apple move their tax residency to the US and export from the US to the European single market, EU member states will no longer be in a position to offer such companies tax rulings.

Where the European Commission considers such tax rulings offer foreign companies a selective advantage they may constitute state aid.

Repatriation of US companies would therefore take such entities beyond the scope of EU state aid surveillance, the official explained.

In an ongoing probe of EU member states’ tax ruling practices, the European Commission has so far opened six cases involving individual companies of which four companies were American (Apple, Starbucks, Amazon and McDonald’s).

Last August, the agency ordered Ireland to recover a record €13bn in unpaid taxes from Apple. The tech giant’s Irish branches received profits for worldwide sales of Apple products outside the Americas.

In its challenge of the European Commission’s €13bn recovery decision, Ireland does not agree with Apple’s position that almost the entirety of its profits are generated by R&D, and should therefore be taxed in the US, PaRR has learned.

The US government last year criticised the Commission for its state aid actions. In a February letter and an August white paper, the US Treasury condemned the Commission’s “new interpretation” of state aid rules in tax cases.

In an effort to rebuff the US criticism, the Commission – for the first time in a state aid case – offered other tax authorities the chance to claim their part of the estimated €13bn recovery amount if they felt entitled to, as reported.

It specifically mentioned that the amount “would also be reduced if the US authorities were to require Apple to pay larger amounts of money to finance research and development efforts.”

The US authorities are understood to have made no such request yet in relation to Apple.

The tax proposal would not have a retrospective impact on any ongoing state aid actions, the official added.

The blueprint of the Republican proposal estimates the total foreign earnings of US companies at more than $2 trillion.

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